Clearly, I like a challenge! Around about now, households across the country are starting to think about gifts for their loved ones.

When it comes to the younger family members, Santa’s list is often populated with the ‘must have’ video game or plastic toy. The easy thing to do now would be to log on to a retailer website, click a few buttons and have it delivered the next day. Done. And when the festivities commence on 25 December, little Archie and Poppy will rip open their gifts, squeal with delight, play with the box for a little while, and then cast said gift onto the pile of toys building up in the corner.  

Whilst I am not suggesting the following would be an easy sell or would cause floods of positive emotions on Christmas day, a financial gift could be more thoughtful and undoubtedly more useful. I like to think that it could also be appreciated for a lifetime.    

A little history 

Approximately 15 years ago, the “next big thing” was a PS3 games console. When launched in March 2007, if you’d bought one as a present, the recommended retail price was £425. Today many of these will be gathering dust or broken.  

Compare this to a pension contribution into an average balanced fund. If £425 was invested in March 2007, it would be immediately boosted by virtue of tax relief. The basic rate of tax in 2007 was 22% but for the purposes of the calculation we will use today’s rate of 20% instead. This raises the value of the contribution to £531. (If you are fortunate enough to make a habit of making gifts like this, there may even be a worthwhile inheritance tax exemption to be claimed). 

From this point onward, the investment journey would not be plain sailing. At the end of 2007, the global credit crunch hailed the commencement of one of the most severe bear markets in living history. In 2016, the European debt crisis caused further wobbles, and today we find ourselves in another severe bear market. Nevertheless, today’s value of the £425 pension contribution would be almost £875*. If the PS3 is still working, its value would be around £70, according to eBay. 

More than money. 

Whilst the financial comparison favours the pension, the PS3 would have been bought for other reasons. So, what else does a pension contribution provide? 

A PS3 is fun. A pension contribution isn’t. One of the benefits of starting a pension for someone else is that you are passing down wealth, but you are also introducing a good habit. In most cases, having a pension with some substance before starting work encourages early adoption of employer pensions. Whilst almost all jobs must ensure enrolment into a company pension scheme, many younger people opt for the minimum contributions or even optout completely. A good rule of thumb is that your pensions should be worth the same as your house. Giving a head start and a gentle push makes the job of building a substantial pension fund a little easier. 

Those starting out in life are facing housing costs that have inflated strongly, whilst wages have grown only modestly. The average house price in the UK is now £296,000 (August 2022). According to the Office for National Statistics “Median weekly pay for full-time employees was £640 in April 2022”. We can assume the average yearly salary in the UK today is therefore around £33,280. This equates to around £2,200 per month take home pay.  

It soon becomes clear why so many young people leave their pension planning too late, and the reason why the average UK pension fund is estimated to be in the region of £40,000, a fraction of the average house price.   

The case for a pension contribution is starting to look quite compelling. I haven’t forgotten the challenge that was set. We still have the obstacle of making little Archie and Poppy delighted when they receive their gifts. For a six year old, it is never going to be the gift they want to open, but it could well be the gift they need and that they will be forever grateful for. Setting up a pension scheme, even for a child, is something we can do for you quickly and easily.

What next?

As always, the Financial Planning Team are on hand to discuss any thoughts or concerns that you may have about passing on wealth, so please do not hesitate to contact us. In the first instance, please contact Ian Wells.

* (The Association of British Insurers Mixed Investment 20% to 60% Shares 29 Nov 2022)